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To Your Credit

Uncle Sam is dusting off the old R&D tax credit--and making it easier than ever to claim.

The checkered history of the Research and Experimental Tax Credit (more commonly known as the R&D Credit, for research and development) has a certain "now you see it, now you don't" quality. In any given year, it's been difficult to know whether the credit is even allowed, and exactly which expenditures qualify have always been hazy as well.

Yet this tax-reduction tool offers potentially powerful savings on the kinds of cost-reduction investments so many businesses are making today. In fact, according to Glenn Mackles, a principal in the national tax department of Deloitte & Touche LLP's Washington, DC, office, "Savings of $20 million or more by large firms are now causing medium-sized and smaller companies to take a closer look at the R&D credit."

Another reason for the new-found interest in the R&D tax credit: A recent U.S. Commerce Department pronouncement on the issue spelled out more clearly than ever before what qualifies as research and development. The upshot is a surprisingly more liberal interpretation than expected, says Mackles.

One of the biggest changes, in Mackles' view, is that it's not just so-called "research companies" or companies "in the R&D phase" that qualify anymore. A large portion of the significant investments made in process engineering by many firms in recent years can probably be subtracted right from their tax bills. And while "process engineering" may sound far too high-tech for you, all it really means is figuring out how to make something better or how to deliver a service more efficiently. If you spent time and money doing this, a portion of those expenses qualifies for a tax credit, according to Mackles.

Remember, too, that unlike a deduction, which simply reduces taxable income, a credit is a dollar-for-dollar reduction of your tax bill. The credit can even be claimed for years past, Mackles says, albeit under guidelines "only an accountant could love."

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This article was originally published in the July 1996 print edition of Entrepreneur with the headline: To Your Credit.

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